Trading blocs

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Trading blocs

A regional trading bloc is a group of
countries within a geographical region that protect themselves from
imports from non-members. Trading blocs are a form of
economic integration, and increasingly shape the pattern
of world trade. There are several types of trading bloc:

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when
countries within a geographical region agree to reduce or eliminate
tariff barriers on selected goods
imported from other members of the area. This is often the first small
step towards the creation of a trading bloc.

Free Trade
Area

Free Trade Areas (FTAs) are created when two
or more countries in a region agree to reduce or eliminate barriers to
trade on all goods coming from other members.

Customs
Union

A customs union involves the removal of tariff
barriers between members, plus the acceptance of a common (unified)
external tariff against non-members. This means that members may
negotiate as a single bloc with 3rd parties, such as with
other trading blocs, or with the WTO.

Common
Market

A ‘common market’ (or single market) is the first significant
step towards full economic integration, and occurs when member countries
trade freely in all economic resources – not just tangible goods. This
means that all barriers to trade in goods, services, capital, and labour
are removed. In addition, as well as removing tariffs, non-tariff
barriers are also reduced and eliminated. For a common market to be
successful there must also be a significant level of harmonisation of
micro-economic policies, and common rules regarding monopoly power and
other anti-competitive practices. There may also be common policies
affecting key industries, such as the
Common Agricultural Policy
(CAP) and Common Fisheries Policy (CFP) of the European Single Market
(ESM).

The main advantages for members of trading blocs

Free trade within the bloc

Knowing that they have free access to each other's
markets, members are encouraged to specialise. This means that, at the
regional level, there is a wider
application of the principle of comparative advantage.

Market access and trade creation

Easier access to each other’s markets means that
trade between members is likely to increase. Trade creation
exists when free trade enables high cost domestic producers to be
replaced by lower cost, and more efficient imports. Because low cost
imports lead to lower priced imports, there is a 'consumption effect',
with increased demand resulting from lower prices.

Economies of scale

Producers can benefit from the application of
scale
economies, which will lead to lower costs and lower prices for
consumers.

Jobs

Jobs may be created as a consequence of increased
trade between member economies.

Protection

Firms inside the bloc are protected from cheaper
imports from outside, such as the protection of the
EU shoe industry
from cheap imports from China and Vietnam.

The main disadvantages of trading blocs

Loss of benefits

The benefits of free trade between countries in
different blocs is lost.

Distortion of trade

Trading blocs are likely to distort world trade,
and reduce the beneficial effects of specialisation and the exploitation
of comparative advantage.

Inefficiencies and trade diversion

Inefficient producers within the bloc can be
protected from more efficient
ones outside the bloc. For example, inefficient European farmers may be
protected from low-cost imports from developing countries. Trade
diversion arises when trade is diverted
away from efficient producers who are based outside the trading area.

Retaliation

The development of one regional trading bloc is
likely to stimulate the development of others. This can lead to trade
disputes, such as those between the EU and NAFTA, including the recent
Boeing (US)/Airbus (EU)
dispute. The EU and US have a long history
of trade disputes, including the dispute over US steel tariffs, which
were declared illegal by the WTO in 2005. In
addition, there are the so-called beef wars with the US applying £60m
tariffs on EU beef in response to the EU’s ban on US beef treated with
hormones; and
complaints to the WTO of each other’s generous
agricultural support.

During the 1970s many former UK colonies
formed their own trading blocs in reaction to the UK joining the
European common market.